Question Answers: CLOSING CASE: Currency Trouble in Malawi

What were the causes of Malawi’s currency troubles?

According to Andrew (2012), the economic growth of Malawi fell from 8.3% to 4.5% between 2007 and 2010. These statistics were reported by the IMF. The resistance of the president of the country for international calls to devalue the currency of the country was a major contributor to the fall of the economic growth of the country. The imports of the country were increasingly surpassing the exports of the country causing an export deficit that brought with itself a wave of inflations. The basic reason for the currency trouble of Malawi were its value that was not acceptable to IMF and other countries of the world.

The president of the country, Mr. Mutharika had taken the office for the second term but he had become dictatorial and did not listen to anyone’s opinion about the country’s economy. He removed the then deputy prime minister Ms. Banda for disagreements over the country’s economic system.

According to the case study, the president had an increased pressure to devalue the currency but he remained unmoved. Therefore, many countries including US and Great Britain stopped their financial and other aid to the country. This added to the already existing troubles of the country. Inflation boosted and many people were moved beyond the poverty line. Many farmers of the country who relied on Tobacco as a source of income had to suffer a blow when the tobacco from Malawi did not bring enough financial return as it used to do in the past. The quality of the crop had been not like before according to the case study.

 

Why did Mutharika resist IMF calls for currency devaluation? If he had lived and remained in power, what do you think would have happened to the economy of Malawi assuming that he did not change his position?

Research has indicated that currency devaluation may not be the answer to a country’s deteriorating exports and increasing imports (Upadhyaya, 1999). Therefore, in my opinion, Mr. Mutharika resisted IMF calls for currency devaluation as he may have thought that there are many other plausible solutions to the currency crisis than only devaluing it.

According to the case study, the president also believed that the currency devaluing would add to the troubles of the people instead of making things better. He thought that the inflation may increase as the money that the people already had would be devalued. This, in my opinion is a serious and genuine concern as if the money devalued, the worth of the money that is owned by the people would immediately decrease and they would be in more trouble than they were before.

The IMF delegation that went to meet the president were too young to provide useful input to the currency crisis in Malawi according to the president. The president doubted their capabilities and believed that they do not possess enough experience or vision to discuss the currency situation with him. Therefore, he didn’t even met them.

The other reason that comes to my mind is that the president might have been incompetent himself. He did not have the courage to make tough decisions and was unable to take any risk. This stopped him from taking a risk of devaluing the currency of his country. He was himself an economist turned politician and should have been able to take the tough economic and political decisions himself.

If the president had lived and remained in power and firm to his position, the international community and especially USA, Great Britain and the IMF would have put more pressure on him and the country’s economy would have suffered more as a consequence.

Now that Malawi’s currency has been devalued, what do you think the economic consequences will be? Is this good for the economy?

I think instead of speculating the economic consequences of the Malawi’s currency been devalued, I would refer to credible online source to shed some light on these consequences. According to an article in The Guardian Newspaper in 2012, the suffering of the Malawians had increased even after the currency had been devalued (“Malawians left counting rising cost of living following economic reform”, 2012). Malawi had agreed to devalue their currency from 1$= 166 kwacha (Malawian currency) to 1$= 300 kwacha. This is a considerable decrease in the price of the currency. The article further argued that the devaluing might have been late and the economy might have gotten worse. These steps needed to have been taken some time ago for their positive effects to have taken place. The inflation in the country had reported a record increase and more people were thrown under poverty.

After Mutharika’s death, the new president, Joyce Banda, acted quickly and tried to normalize relations with IMF and the donor countries like USA and Great Britain. After taking over the office, she reduced the value of the currency by almost 50%. This move was intended at unlocking the expected economic assistance from IMF and the unfreezing of the donations from the donor countries. The flow of the aid money did not start immediately. The immediate impacts of the devaluing of the currency were not in the favor of the country’s economy or its people.